Govt looking to fast-track new bank licences

Though the government has been pushing the central bank to quicken the process of issuing new bank licences, RBI has only issued two drafts for public discussion in two years. Photo: Ramesh Pathania/Mint

Updated: Wed, Oct 10 2012. 09 22 AM IST

New Delhi: In an indication that the government is keen to issue new bank licences, a senior finance ministry official has disclosed that his ministry has sought legal opinion on how the Reserve Bank of India (RBI) can be empowered to do this through executive action instead of awaiting legislative sanction.

“RBI wants powers to supersede boards and look into associate companies. We are seeing how this can be done without an amendment,” this person added, asking not to be identified. “We are working with our legal team to see what can done. No decision has been made yet.”

The growing polarization of political opinion in the country and dissent within the Congress-led United Progressive Alliance have stymied the government’s efforts to get Parliament to approve several Bills, including the Banking Laws (Amendment) Bill approved by the Union cabinet in April.

The Bill seeks to increaseRBI’s regulatory powers through which it will be able to supersede the boards of institutions that aren’t properly run. This was one of the main preconditions of the central bank for the issuance of new bank licences to private sector companies—a promise made by then finance minister Pranab Mukherjee in his budget speech in 2010.

The Indian Express newspaper reported last week that RBI is expected to publish final guidelines this month and is likely to invite applications for four bank licences.

The government had envisaged allowing more private sector companies into the banking space to promote inclusive growth, increase competition, and make banking services more affordable and accessible. “There is no right time for issuing bank licences. We need it to introduce competition,” the finance ministry official added.

Though the government has been pushing the central bank to quicken the process of issuing new bank licences, RBI has only issued two drafts for public discussion in two years. The second draft was put up for comments in August last year.

That draft proposes a minimum capital requirement of Rs.500 crore, and a foreign holding less than 49% in the first five years of the bank’s operation. To ensure that large corporate houses do not misuse banks they promote to route funds to their subsidiary companies, the central bank has said that the exposure of the bank to any entity in the promoter group cannot exceed 10%, and the total exposure to all the group entities cannot exceed 20% of the paid-up capital and reserves of the bank.

The bank will also have to open at least 25% of its branches in unbanked rural centres.

Besides giving the central bank more powers, the Banking Laws (Amendment) Bill also seeks to increase the limit on voting rights of shareholders in private banks, in a move that may encourage investors to set up private sector banks in India.

“It is high time that things are speeded up. But all of RBI’s concerns should be addressed,” said Robin Roy, an associate director at audit and consulting firm PricewaterhouseCoopers. “RBI has been waiting for these enabling legislation and amendments to ensure that there are no strategic gaps and doubts in the minds of the stakeholders regarding regulations when it does issue the banking licences.”